How does volatility affect stock prices

The market, after all, is a reflection of how companies and industries are valued in our society. Being the fickle creatures that we are as human beings, our ideas of value change all the time. Investing always carries some risk. When investors, particularly at the hedge-fund level, sense cause for concern, we can watch that drama play out on the stock market.

But one factor influences share prices more than any other: Profit. Ahead, we break down how the many factors work together to influence stock prices. The two most fundamental factors boil down to profitability and the valuation ratio, says Juan Pablo Villamarin , CFA and senior investment analyst at Intercontinental Wealth Advisors.

Technical factors can also include the time of day or specific days of the week a trade takes place compared to other days and times, says Villamarin. In addition, the price movement of one stock compared to the movement of another stock in the same industry or business sector can also influence the stock price. Trends — both historically from the company and an industry as a whole — are considered technical factors. In January , for example, Apple shares fell in price despite the company reporting record quarterly profits.

Things happening in the world at large can also affect stock prices. The first was in March and the most recent was this summer as the Delta variant surged around the country, causing traders to worry about market recovery.

Sentiment drives demand, which also influences supply. Psychology is critical for market dynamics. There are several theories that try to explain how market sentiment can drive the supply and demand of stocks:. The Behavioral Financial Theory: This theory looks at psychological factors when analyzing financial markets. Some investors act on emotion and in some cases, overconfidence in a particular security or asset. These reactions can cause biased investing decisions, potentially hurting your investment.

The Animal Spirit Theory: This theory assumes that people act on instinct in situations of uncertainty, the same way animals are said to operate. In turn, actions — like making moves on the stock market — are also driven by instinct.

When the market is good, investors will buy. When the market is bad, investors will sell. The lower the VIX, the lesser the fear. Volatility is the rate at which the price of a stock increases or decreases over a particular period. Higher stock price volatility often means higher risk and helps an investor to estimate the fluctuations that may happen in the future.

If the price of a stock fluctuates rapidly in a short period, hitting new highs and lows, it is said to have high volatility.

If the stock price moves higher or lower more slowly, or stays relatively stable, it is said to have low volatility. Historic volatility is calculated using a series of past market prices, while implied volatility looks at expected future volatility, using the market price of a market-traded derivative like an option.

Governments play a major role in regulating industries and can impact an economy when they make decisions on trade agreements, legislation and policy. Everything from speeches to elections can cause reactions among investors, which influences stock prices. Economic data also plays a role, as when the economy is doing well, investors tend to react positively. Monthly jobs reports, inflation data, consumer spending figures and quarterly GDP calculations can all impact market performance.

In contrast, if these miss market expectations, markets may become more volatile. Specific events can cause volatility within a particular industry and sector. In the oil sector, for example, a major weather event in an important oil-producing area can cause oil prices to increase. As a result, the stock price of oil distribution-related companies may rise, as they would be expected to benefit, while those that have high oil costs within their business may fall. Similarly, more government regulation in a specific industry could result in stock prices falling, due to increased compliance and employee costs that may impact future earnings growth.

Positive news, such as a strong earnings report or a new product that is wowing consumers, can make investors feel good about the business. If many investors look to buy it, this increased demand can help to raise the stock price.

In contrast, a product recall, data breach or bad executive behaviour can all hurt a stock price, as investors sell off their stocks. Depending on how large the company is, this positive or negative performance can also have an impact on the broader market.

Volatility is not always a bad thing, as it can sometimes provide entry points from which investors can take advantage. Market volatility refers to the level of fluctuation the market is currently experiencing. So, when stock does not have a stable price — i.

Volatility can also occur within stock types, and is less alarming in some industries than others. For example, the stock of blue-chip companies tends to be relatively steady, but tech stock fluctuates far more. In the case of , COVID had a huge impact on the stock market, causing massive levels of volatility. Here are just some of the ways it can impact you and your business:.

When the economy is in trouble, it puts people in financial difficulty. They are forced to turn to credit due to the volatile market, meaning they must put themselves in debt.

When the market is uncertain, customers are quick to exercise caution about their spending habits. Take — there was suddenly much less stability around jobs and futures. When the market is notably volatile, the event will most likely start making headlines, like the recession. Knowing the economy is not stable, whether this instability has directly impacted them or not, is enough for consumers to reign in their spending habits.

This is something that is difficult to guard against, even if your business is doing well. Investors who were interested in your company may have to step away if market volatility becomes an issue. Investors, just like everyone else, will be worried about the risk of striking big, expensive deals in the midst of stock market volatility.

While a restless economy can lead to higher levels of unemployment, you may also experience the opposite if you are looking for new talent. Companies will try hard to cut costs to see out the times of uncertainty.